Denver -- Tele-Communications Inc.'s trip down the
yellow brick road to Basking Ridge, N.J., where AT&T Corp. is headquartered, seems to
have hit a few bumps.
Since last year, the MSO and the long-distance giant have
been in talks -- code-named 'Kansas,' in an allusion to The Wizard of Oz
-- for a trio of deals, which, so far, yielded AT&T's January purchase of
Teleport Communications Group in an all-stock transaction valued at $11.3 billion. The
code name reflects @Home Network in the starring role as Dorothy, AT&T as Oz and cable
operators as wizards, sources said.
But two other deals -- a large AT&T investment into TCI
for network upgrades, and a plan to merge TCI-controlled high-speed-data service @Home
with the already-combining data services of Time Warner Inc. and MediaOne -- are in
trouble, according to executive sources close to the discussions.
A TCI spokeswoman denied that any of the various
discussions had hit a snag.
At issue, according to sources, are a whirling dervish of details. On the TCI deal,
AT&T is unhappy with the amount of public scrutiny about the deal's progress, as
well as being wary about lending its coveted brand name to an Internet protocol-based
service running on aging cable plant.
On the other side, TCI and other cable operators are
displeased with the chasm between what they consider adequate network quality and
AT&T's legacy of 'overengineering and gold-plating' its networks,
executives said. This could mean that operators might have to spend considerably more than
they feel is necessary to upgrade their plant.
Fueling AT&T's desire to work with cable is a need
to reach into the local loop to provide IP-based telecommunications services to customers.
A merger between the two biggest data services would give
AT&T a national footprint with an in-place high-speed backbone and IP network, where
it could lend its strong brand name to IP phone services. AT&T has so far been unable
to crack the local-exchange-carrier market.
A cash infusion into TCI would give the MSO better
financial muscle to upgrade its clustered systems to provide two-way and other advanced
Officials on all sides have repeatedly declined to discuss
the remaining deals, and that held true last week. Two weeks ago, AT&T chairman and
CEO Michael Armstrong said AT&T's local-loop options include cable,
fixed-wireless and mobile-wireless techniques.
But beyond AT&T's interests, however logical, deal
participants on all sides remain engaged in discussions with other players.
Last week, executive sources close to the merging Road
Runner and MediaOne Express services said they are also in talks with several West Coast
companies, including Oracle Corp., Intel Corp., Sun Microsystems Inc. and Microsoft Corp.
At this point, sources said, the Road Runner/MediaOne
Express group is closer to taking a $1 billion check from one of those companies, after
which it would locate itself on the West Coast and quickly move toward an initial public
'It is all still up in the air,' said an
executive source who requested anonymity. 'The name of the game is to keep every
potential partner believing that every other potential partner is about to make a deal
[with Road Runner/MediaOne Express].'
Executive sources also said that if Road Runner and
MediaOne Express do link arms with an outside partner, such as Microsoft , there would
still be room for a 'separate but equal' deal with AT&T for
'AT&T will try to do something with the pair, in
addition to @Home,' an executive source said. 'They wouldn't be dumb enough
to do a residential IP-telephony thing with only the @Home footprint.'
Tom Jermoluk, chairman and CEO of @Home, said last week
that a merger is still a viable option, but that the complexities of such an arrangement
'Neither one of us [@Home or Road Runner] are looking
at this and saying, 'We've got to do this, or else,' -- it's not like we're facing the
firing squad here,' Jermoluk said.
'Our business model works just fine with 50 million
homes, and theirs [Road Runner/MediaOne] works fine with 27 million homes,' Jermoluk
added. 'But on the other hand, you look at [a merged entity] and say, 'Gee, 80
million homes' -- that's a lot of the upside.'
Reactions from the financial community to the stalled TCI/AT&T talks were mixed last
Spencer Grimes, an analyst with Salomon Smith Barney, noted
that Armstrong has said that he's not going to subsidize operators.
Another analyst, who asked not to be identified, said a
breakdown in @Home and Road Runner/MediaOne Express merger talks is not surprising on
'Time Warner wants to keep a tight hold on Road Runner
as its showcase for other Time Warner media and products, and [an @Home] merger could push
that off into the background -- that's not an option for Time Warner,' the
Plus, the deal structure could prove problematic if Time
Warner wants a deal as sweet as the one that Cablevision Systems Corp. got when it joined
@Home last year.
'There are [stock] dilution concerns here,' the
analyst said. 'The other partners would have to say, 'Hey, why would I want this
much dilution?' It would be devastating to [@Home parent At Home Corp.'s]
By one analyst's reckoning, Cablevision received 5.5
million At Home shares for access to 11 million passed homes. The Road Runner combination
would bring 27 million homes to the table. Using the same formula, that would mean 54
million At Home shares for Road Runner -- or 40 percent of At Home's outstanding
That analyst, who asked not to be named, did not believe
that this would be overly dilutive, considering what @Home was willing to pay Cablevision.
TCI executives were not available for comment. Wall Street
analysts remained hopeful that TCI president and chief operating officer Leo J. Hindery
Jr. -- acknowledged as the master of reviving stalled deals -- will remove any remaining
obstacles so that broadband-services momentum can proceed.
TCI chairman and CEO John Malone has referred to
long-distance carriers, as well as to banks and large advertisers, as 'anchor
tenants' on the MSO's broadband plant. Those 'anchor tenants' could,
through the economies of scale afforded by the industry's unity on large set-top
orders, offset the steep costs of getting broadband services in motion.
Kent Gibbons contributed to this story